Answer: effective duration.

**Explanation:** **Effective duration** is the correct answer because it measures the sensitivity of a bond's price to changes in the benchmark yield curve, accounting for embedded options (like call or put features) that affect cash flows when interest rates change. **Why other options are incorrect:** 1. **Modified duration (Option B)**: Measures price sensitivity to changes in the bond's yield to maturity (YTM), assuming a parallel shift in the yield curve and no changes in expected cash flows. It doesn't account for embedded options. 2. **Price value of a basis point (PVBP) (Option C)**: Measures the change in bond price for a 1 basis point change in yield. While related to duration, it's an absolute dollar measure rather than a percentage sensitivity measure. **Key Differences:** - **Effective duration** = (P- - P+) / (2 × P0 × Δy) Where P- = price when yield decreases, P+ = price when yield increases, P0 = initial price, Δy = change in yield - **Modified duration** = Macaulay duration / (1 + y/k) Where y = yield to maturity, k = number of compounding periods per year - **PVBP** = (Price × Modified duration) / 10,000 Since the question specifically asks about sensitivity to changes in the **benchmark yield curve** (which affects bonds with embedded options differently), effective duration is the most appropriate measure.

Author: LeetQuiz .